Modeling the horizon-dependent ex-ante risk premium in the foreign exchange market: Evidence from survey data

Georges Prat and Remzi Uctum

Journal of International Financial Markets, Institutions and Money, 2013, vol. 23, issue C, 33-54

Abstract: Using Consensus Economics survey data on experts’ expectations, we aim to model the 3- and 12-month ahead ex-ante risk premia on the JPY/USD and the GBP/USD exchange markets. For each market and at a given horizon, we show that the risk premium is well determined by the conditional expected variance of the change in the real exchange rate, agents’ real NMP in assets and a constant composite risk aversion coefficient, as suggested by a two-country portfolio asset pricing model. The expected variance depends on the past values of the observed variance and the unobservable real NMP is estimated as a state variable using the Kalman filter methodology. We found that the trends of our estimated horizon-specific NMPs are consistent with the ones of the observed short term aggregate NMPs calculated using the U.S. Treasury International Capital System dataset. Moreover, we show that the ex-post premia tend to adjust toward the ex-ante values, suggesting that experts’ beliefs provide a relevant information to the market. These results bring new responses to the difficulties reported by the widespread ex-post risk premium literature and enhances the usefulness of survey data in modeling the risk premium.

Keywords: Risk premium; Foreign exchange market; International asset pricing model; Survey data (search for similar items in EconPapers)
JEL-codes: D84 F31 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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Working Paper: Modeling the horizon-dependent ex-ante risk premium in the foreign exchange market: evidence from survey data (2013)
Working Paper: Modeling the horizon-dependent ex-ante risk premium in the foreign exchange market: evidence from survey data (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:23:y:2013:i:c:p:33-54

DOI: 10.1016/j.intfin.2012.09.005

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